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SOGEN FUNDS'
JEAN-MARIE EVEILLARD ET AL.
(continued from preceding
page)
Eveillard: The primary use of their corrugated board is for packaging. So, as you might expect, the demand for their product is tied to the health of the French economy. And the last few years haven't exactly been salad days.
OID: So we're actually looking at a depressed period.
Eveillard: That's with them getting hit from all sides. Not only were they in the weak part of the cycle for paper, but the French economy was weak.
OID: So that 1995 probably didn't give them a chance to show their full earning power.
Eveillard: That's right.
Tobin: In part, that's because 1995 was a very short- lived recovery. What was also unusual is that there was actually a shortage of' their primary raw material - which is waste paper. So their costs increased sharply. And the prices of their products and raw materials alike fluctuated wildly in a way that two generations of the company's managing families say they had never seen. So their operating margins did not expand as much as one might have expected considering how much corrugated paper and board prices rose.
OID: So that averaging out Emin Leydier's returns for 1995 and 1996 might be overly conservative?!
Tobin: That's right.
Eveillard: I think you can begin to get some idea of how much earning power this company has if you look at the results they reported in 1990 and 1991 - when, based on their unadjusted reported return on equity, their return on average equity was up around 22%.
OID: But could those higher profits simply have been because they had depreciated their equipment to zero and were, therefore, reporting inflated earnings?
Eveillard: Not at all.
Tobin: Not only did they have much less leverage in 1990, but they were much smaller, as well. So they should enjoy much greater economies of scale today - especially given the state-of-the-art machinery they have. They've automated their production to a lar greater degree and, simultaneously, dramatically lowered their costs and increased their capacity - at least in their paper division.
And now they're working on increasing capacity in their corrugated board division to bring the same efficiency to it.
OID: And, presumably, you don't believe that everybody else has gotten more efficient, too?
Tobin: There has been ongoing consolidation in the industry which presumably leads to improved productivity. However, Emin Leydier today produces 1,600 tons of paper per employee versus the industry average of 1,100 tons.
Eveillard: Also, they've basically been in the process of assimilating acquisitions and equipment going back to 1990 and beyond - although not on the same scale. I don't think we've yet seen them demonstrate what they're capable of earning.
Tobin: That's right. They moved into high gear in 1993. That's when they added the new paper machine.
Page 18 of 20
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